‘Frugal four’ battle to maintain EU budget rebates

The EU’s “frugal four” governments are battling to protect billions of euro in lucrative budget rebates, arguing that the value of their cashbacks risks being whittled away in future years due to low growth and inflation caused by the pandemic.

Countries led by Denmark and the Netherlands are pushing to index their prized rebates – which were won during an EU leaders’ summit last month – by 2 per cent a year to prevent the real-terms value declining over the bloc’s next seven-year budget, say diplomats.

Austria, the Netherlands, Sweden and Denmark all secured bigger budget rebates as their price for agreeing to the EU’s €750 billion Covid-19 recovery package – known as Next Generation EU – during marathon negotiations last month.

The alliance of richer northern member states – who are net contributors into the EU budget – have argued the lump-sum reductions help limit their contributions and ensure financial fairness.

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But rebates – a legacy of the UK's membership of the EU, with the first rebate won by UK prime minister Margaret Thatcher in 1984 – have divided member states. Before the recovery fund negotiations, France and the European Commission had led a push for all rebates to be abolished after Brexit.

Diplomats from the frugal countries said that having won substantial increases to their rebates – which are worth €7.6 billion a year in total – they would now push to ensure that a 2 per cent “deflator” is applied to the annual amounts to prevent the value from being “hollowed out”.

One diplomat said countries could lose tens of millions of euro a year in real terms due to projected poor economic performance.

The demand has met resistance from southern and eastern member states who are due to be among the biggest beneficiaries of the EU’s recovery package. One EU official said there was “no consensus” on the 2 per cent index.

The value of the rebates is among a number of outstanding issues in the recovery fund and EU budget deal, all of which will have to be finalised in the coming months.

Majority support

The bloc’s €1.07 trillion seven-year budget still needs the majority support of the European Parliament before the end of the year to come into force. A number of the EU’s national parliaments will also have to ratify the recovery plan.

One EU diplomat said the Frugals demands to bolster the value of the rebates was part of a broader negotiating ploy to win other concessions in the talks – namely over how far to link distribution of the funds to compliance with the rule of law.

The so-called frugal countries have been advocates of tougher financial penalties for governments that breach fundamental values such as freedom of the press and civil liberties. The issues are due to be taken up by EU ambassadors and their capitals in September.

In the final summit agreement, Austria managed to double its rebate to €565 million a year, while the Netherlands won an increase from €1.5 billion to €1.9 billion, and Denmark from €222 million to €377 million.

Germany was the only one of the rebate countries not to get an increase, with chancellor Angela Merkel saying it was not a priority for her government as Berlin holds the rotating presidency of the EU.

Higher rebates for the frugal four were accompanied by cuts to proposed recovery fund grants from €500 billion to €390 billion by shrinking spending on pan-EU programmes related to health, private sector support and development.

‘Regrettable details’

Janez Lenarcic, the EU’s crisis management commissioner, said the funding squeezes were the “regrettable, unfortunate details” of the “wonderful big picture of Europe standing together”.

“A compromise had to be reached, and that was the price for it,” he said. “This does not make everybody happy – it doesn’t make me happy. Because I believe in the need for Europe to show solidarity with the rest of the world and to help others.”

A €7.7 billion programme proposed by Brussels to improve the resilience and preparedness of EU member state health systems had been “completely erased” from the recovery package, he said, as had a €26 billion solvency fund for businesses hit by the pandemic.

In addition, the commission’s total proposal for humanitarian aid under the recovery package and the new seven-year budget was cut in the final agreement from €14.8 billion to €9.8 billion – more than in the previous seven-year budget, but less than some had hoped.

Mr Lenarcic said the loss of the external aid money damaged the “enlightened self-interest” of the EU, as it could only recover if partner countries around the world did as well.

“Europe cannot be an island of prosperity and wellbeing in a sea of misery,” he said. “We cannot recover alone with the disease, or its economic and social consequences around us being left unattended – that won’t work.” – Copyright The Financial Times Limited 2020